In Hargreaves Property Holdings Limited v HMRC, the Court of Appeal dismissed the taxpayer’s appeal against the Upper Tribunal’s decision (which I covered in a blog post here). The taxpayer had initially appealed to the Upper Tribunal against the FTT’s decision on four grounds, of which I focussed on two: 

• whether interest payments made to a UK tax resident company fell within the exception from withholding tax under section 933 of the Income Tax Act 2007 (on the basis that the UK-resident in question is considered “beneficially entitled” to the income paid to it for the purposes of section 933); and 
• whether the interest on the loans constituted “yearly” interest. 

In my blog post, I concluded it was “unsurprising” that the Upper Tribunal found against the taxpayer on these grounds. The taxpayer appealed against the Upper Tribunal’s decision on the two grounds mentioned above (dropping the other two grounds it had raised against the FTT’s decision) and, again, unsurprisingly the Court of Appeal dismissed the appeal. Following the Upper Tribunal judgment, there remained some open questions as to just how far some of the Upper Tribunal’s reasoning could be pushed and what the implications of that could have been in practice.

In summary, following the Court of Appeal’s judgment, it is now clear that the mere on-payment by a recipient will not itself be sufficient to switch the beneficial entitlement for the purposes of section 933. This is helpful insofar as it addresses some of the concerns caused by parts of the Upper Tribunal’s judgment. The Court of Appeal also, quite helpfully, confirmed the orthodoxy from Bupa Insurance that the onus is on the taxpayer to demonstrate that it is beneficially entitled to a payment (in this case, a payment of interest) and without evidence to support such a claim, the courts are free to conclude that no such beneficial entitlement exists. The Court of Appeal did not go any further than Bupa Insurance in this respect, where it was sufficient that the recipient retained the exposure to the benefit of any foreign exchange fluctuations over a ten-day period. It is possible that had the taxpayer in this case been able to point to any benefit which could have, in the Court of Appeal’s words, been described as “meaningful” (as the taxpayer in Bupa Insurance managed to do), the taxpayer may have had a better chance at success here.  

Beneficial entitlement 

The Upper Tribunal shared the FTT’s view that it was bound by the Ramsay principle to adopt a purposive approach in construing the legislation, in particular sections 874 and 933 of the Income Tax Act 2007. Ultimately the Upper Tribunal concluded that it would have been “extraordinary” if it were possible to avoid the obligation to withhold under section 874 simply by means of a mere imposition of a UK entity as the recipient of interest where the commercial and practical reality of any ‘pass through’ payment obligations give rise to the very same tax collection concerns which section 874 exists to mitigate. 

Before the Court of Appeal, the taxpayer argued that rather than adopting the Ramsay principle to interpret the meaning of ‘beneficially entitled’, the Court of Appeal was bound by, amongst other authorities, Wood Preservation, Bupa Insurance and the more recent cases of Bostan Khan and Thomas William Good not to apply the Ramsay principle on the basis that “citizens should be able to understand parliamentary enactments … they should be able to rely upon what they read in an Act of Parliament”. Presumably that argument was on the basis that if the interpretation of legislation in accordance with Ramsay required a judge-led court exercise to purposively construe a piece of legislation, that would be incompatible with that principle. 

The Court of Appeal did not accept that the phrase ‘beneficially entitled’ was “in any sense immune” from the Ramsay principle, particularly because the principle has multiple instances of Supreme Court endorsement (most recently in Rossendale BC v Hurstwood). 

Having analysed the various authorities, the Court of Appeal drew out the following principles: 

• whilst “not a term of art” the phrase ‘beneficially entitled’ means “ownership for the benefit of the person in question”; 
• there is a “significant degree” of overlap between ‘beneficial ownership’ and ‘equitable ownership’;
• simply because a term or phrase may be well established in case law does not mean the “usual” approach to statutory interpretation should be ignored; 
• a person who is the legal owner of property will not be the beneficial owner of that property if they “do not in fact have any of the benefits”;
• it is possible for a property owner not to possess (or to lose) beneficial ownership without it vesting anywhere else; and
• (citing Bupa Insurance) in construing ‘beneficial entitlement’, it is appropriate to have regard to the authorities which consider the concept of ‘beneficial ownership’. 

Applying Ramsay to the facts, the Court of Appeal agreed that the purpose of section 874 was that of a tax collection mechanism to collect tax directly from non-UK residents and further agreed with the Upper Tribunal’s view on the purpose of section 933, stating that it was intentional for section 933 to apply only to payments to UK-residents because “in any event” those payees would have to make returns of their income to HMRC and account for any tax properly due. That would of course not be the case for non-UK residents. 

That being said, the Court of Appeal did seek to quell concerns that some parts of the Upper Tribunal’s judgment gave rise to the position that “mere payment on by the recipient” would cause beneficial entitlement to be lost (which was one of the concerns I raised in my blog post) by saying instead that the actual question is whether or not there is “anything” in the context of a “scheme” of which the payments form part which would make a difference to the question of beneficial entitlement. In this case, the fact that the UK-resident recipient of the interest payments did not benefit from its entitlement to interest (and could not show that it, in any way, did) is what made the difference to the question of beneficial entitlement for the purposes of section 933. It was not enough that the UK-resident was still required to bring those receipts into account for corporation tax purposes. The Court of Appeal’s concluding thoughts on the point ended on there being “no evidence to suggest that Houmet [the UK-tax resident] could have used the funds received for any other purpose, or that it could benefit from them in any other manner”.

For completeness, the Court of Appeal concluded that neither Bostan Khan nor Thomas William Good (the former case being covered by this blog post) made a difference because those cases centred around the concept of ‘receiving’ or being ‘entitled’ to income which are broader concepts than beneficial entitlement. 

Overall, on the question of beneficial entitlement, the Court of Appeal conducted a thorough review of the authorities relating to ‘beneficial entitlement’ and ‘beneficial ownership’. There are helpful comments which make clear that, whilst very similar (to the point that ‘beneficial entitlement’ should be construed with regard to cases on ‘beneficial ownership’), the two are not exactly the same (nor can they be equated with the concept of ‘equitable ownership’). Similarly, the Court of Appeal’s move away from the Upper Tribunal’s suggestion that mere on-payment by a recipient would be enough to switch beneficial ownership provides some much needed clarity on the potentially wide-reaching implications of the view taken by the Upper Tribunal. The question of whether the recipient has or retains the benefit of income is not novel and has been a feature of the case law since, at least, Bupa Insurance (where the entitlement to foreign exchange fluctuations was seen as sufficient benefit by the Upper Tribunal).

“Yearly” interest 

It took the Court of Appeal no more than six paragraphs to find that it agreed with the FTT and Upper Tribunal’s view that the interest paid on the loans was “yearly” interest (and therefore subject to the general obligation to withhold under section 874). Despite, amongst other things, the fact that the loans each lasted around a year or less and were subject to re-advance only upon enquiry (and not automatically as such), the Court of Appeal nonetheless concluded that the loans had “a permanency that belie their apparent short-term nature”. The Court of Appeal also mirrored the Upper Tribunal’s view that the loans should not be viewed “with blinkers” and found that it could not simply view the loans “in isolation” (as the taxpayer would have preferred). Instead, on a “business-like assessment” the loans provided long-term funding in the nature of an investment. 

This part of the judgment serves as a reminder that where financing structures involve ‘repayment and re-advance’ or ‘rollover’ mechanics (which are not uncommon), additional scrutiny is needed to ensure that any expectation of paying interest gross and the risk of withholding cutting across that expectation is appropriately addressed and the risk allocated in accordance with the wider commercial agreement. The Upper Tribunal’s decision is probably of more help in this regard in light of some of the guidance in its judgment (for example, that any re-advance being refused must not be merely “theoretical”), and comfort can be taken from the seemingly wholesale endorsement of the Upper Tribunal’s decision on this point by the Court of Appeal.